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Fifth HealthSouth CFO Pleads Guilty

Director testifies ex-CEO Scrushy was “closely involved”

Feb 25, 2003 | AP

The interim chairman of HealthSouth Corp. testified against ousted CEO Richard M. Scrushy as a co-founder of the rehabilitation giant became the 11th person agreeing to plead guilty in a huge accounting fraud.

SCRUSHY WAS “closely involved in all facets of the company,†said Joel C. Gordon, a director since 1996. His testimony Thursday contradicted defense arguments that Scrushy was a mere figurehead who knew little about HealthSouth’s finances.

The Securities and Exchange Commission called Gordon to bolster its case against Scrushy, accused by the government of directing a scheme to overstate HealthSouth earnings by some $2.5 billion since 1997.

Scrushy’s lawyers have claimed his top aide, William T. Owens, engineered the fraud and was demoted by the board because of an attempted “coup†to remove Scrushy. Gordon, however, said Owens was reassigned at Scrushy’s request and only because the company canceled a planned corporate spinoff in January.

The testimony came in a federal court hearing in which Scrushy is seeking access to his personal millions, which U.S. District Judge Inge Johnson has temporarily frozen at the government’s request. Closing arguments in the hearing will be Friday.

Meanwhile, federal prosecutors said one of Scrushy’s co-founders, former chief financial officer Aaron Beam, had agreed to plead guilty in the scheme.

Beam was accused of bank fraud for allegedly using bogus financial information to obtain loans from 32 lenders totaling $1.25 billion in 1996 and 1997. Scrushy and others paticipated in the fraud, prosecutors said.

HealthSouth has had five CFOs, and now all of them have agreed to plead guilty. Beam was the longest serving, holding the position from 1984 until October 1997.

In the civil hearing, Gordon said he and other independent directors voted unanimously to fire Scrushy last month out of concern over HealthSouth’s viability.

The company is now trying to sell its two hospitals in Birmingham and Coral Gables, Fla., to raise cash and avoid bankruptcy, he said. Outside of court, Gordon said he did not know whether the plan would work.

Seeking to damage Gordon’s credibility, Scrushy lawyer Tom Sjoblom pointed out that Gordon has brought in a consultant who also did work for a HealthSouth competitor, Select Medical Corp.

Under questioning from Sjoblom, Gordon said he has ridden on HealthSouth’s corporate jets while also criticizing the extravagance of the company’s fleet of 11 aircraft. “We’ll only have two from now,†Gordon said.

An assistant vice president for finance, Kelly Coleman, also testified that she heard in a meeting last summer that Scrushy had backed a plan to end the fraud by engineering a corporate spinoff, selling assets, and blaming a Medicare reimbursement change. Afterward she said the rest of the company would be private.

Coleman said the idea was revealed by former chief financial officer Weston Smith, the first of the 11 HealthSouth executives to agree to plead guilty to fraud charges.


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